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A Quantal Response Model of Firm Competition

Author

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  • Ellis Scharfenaker

    (Department of Economics, New School for Social Research)

Abstract

The distribution of profit rates in the U.S. economy for 21,714 firms from 1962 - 2012 appears to be highly organized in a Laplace-like distribution. Positive profit rate deviations from the mode appear to be remarkably stationary over time displaying little parametric changes while negative profit rate deviations introduce an asymmetry into the distribution that appears to fluctuate over time. In this paper I propose a model of ``classically" competitive firms facing informational entropy constraints in their decisions to potentially enter or exit markets based on profit rate differentials. The result is a three parameter logit quantal response distribution for firm entry and exit decisions. Bayesian methods are used for inference into the the distribution of entry and exit decisions conditional on profit rate deviations and firm level data from Compustat is used to test these predictions. The model parameters show a fluctuating asymmetry in firm exit decisions, an increase in dispersion of negative profit rate differentials, and a falling general rate of profit.

Suggested Citation

  • Ellis Scharfenaker, 2015. "A Quantal Response Model of Firm Competition," Working Papers 1507, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:1507
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    References listed on IDEAS

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    Cited by:

    1. Williams, Michael A. & Baek, Grace & Park, Leslie Y. & Zhao, Wei, 2016. "Global evidence on the distribution of economic profit rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 356-363.

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    More about this item

    Keywords

    Firm competition; Laplace distribution; Gibbs sampler; profit rate; statistical equilibrium; rational inattention; information theory; quantal response;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D20 - Microeconomics - - Production and Organizations - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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